Analysis of Alternative Forms of Ownership and Alternative Business Models for Maui County's Electric Utility Company

From County of Maui RFP 14-15/P-92 December 23, 2015 Prepared by Guernsey Engineers (excerpt)

EXECUTIVE SUMMARY

The principal goal for an electric utility is to provide safe, reliable, and affordable electricity; in addition, the State of Hawaii and the County of Maui recognize the need to eliminate reliance upon fossil fuels for both economic and environmental reasons. Three main inter-related objectives are desired for future electric service in Maui County:

1. Energy Security and Resiliency

2. Electricity Cost

3. Renewable Energy Integration

Guernsey was tasked by the County of Maui (the County) to complete an options analysis for electrical utility service within the County. The County desires to move to 100% renewable and sustainable energy as quickly as practicable and has concerns about the prospects of such progress under the status quo.

Guernsey believes the ideal path forward to meet the County’s objectives is to organize, develop and enable a private entity akin to an Independent System Operator (ISO) or Regional Transmission Operator (RTO) to oversee the electric grid and energy market while ensuring a reliable power supply, adequate transmission infrastructure, competitive wholesale prices and fair access for renewable power. This approach has several notable advantages:

There would be little physical infrastructure that would need to change hands, and as such the capital costs for this approach are relatively low. The ISO/RTO would need to acquire existing dispatch, monitoring and control equipment in order to manage the transmission/distribution system; however, the great majority of existing MECO generation assets along with MECO transmission and distributions wires would remain with MECO. 

This approach has the potential for quickest implementation, although a timeline is highly uncertain. The County would need to organize political capital to introduce, negotiate and enact enabling legislation at the State level which would take an unknown amount of time. However, given enough political willpower this route could be completed much more quickly than a negotiated sale or condemnation of the MECO assets, which could take five to seven years or longer. 

This approach can be implemented regardless of the outcome of the HEI/NextEra merger; whatever the regulated electric utility provider for Maui County might be, the utility would be subject to the jurisdiction of the ISO/RTO. 

This approach promotes competition by providing clear price signals and market transparency so that power producers of all types can make rational economic decisions; this approach also optimizes transmission planning such that all power producers are incorporated into planning and infrastructure improvement efforts.

Should the ISO/RTO approach be unacceptable or not capable of being accomplished, Guernsey believes that the most technically advantageous route to enhanced renewables integration must include a change of ownership of some or all of MECO’s existing assets. At a minimum, MECO’s transmission and distribution assets (including its dispatch control center) would need to be acquired by a third party, with such third party being empowered to function substantially similar to an ISO/RTO. If such empowerment could not be obtained, then MECO’s generation assets would also need to be acquired to achieve the desired results.

Of the two primary alternatives for third-party ownership – cooperative or municipal – Guernsey believes the most practical choice to be a cooperative business model. Legal issues aside, there are practical considerations such as public procurement laws, collective bargaining and bond ratings that make the municipal route more problematic than following a cooperative path.

In order to purchase MECO’s assets, a third party could expect to pay from a low of $525 million (book value) to a high of $867 million (replacement cost new less depreciation) depending on negotiations or the result of a condemnation / eminent domain action. In either a municipal or cooperative business model, it is expected that most if not all of the purchase price would need to be debt financed. The debt financings of either business model would include requirements for a debt service coverage ratio, or a multiple placed upon revenue requirements of the new utility; in the case of a cooperative, Guernsey expects this coverage ratio could be 1.25 or greater. Based upon our analysis, we find the debt service coverage ratio will offset some of the benefits of overall lower cost of capital and exemption from income taxes; however, overall utility rates could nevertheless decrease approximately six percent assuming the new owner can acquire the utility assets at close to net book value and operate those assets at least as efficiently as MECO currently does. Under a cooperative business model, the marginal revenue collections related to achieving the debt service coverage ratio would eventually be returned to customers in the form of capital credits. Capital credits are typically returned to customers in an orderly fashion on a rotational basis from ten to twenty years.

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MECO Responds to Guernsey Report

News Release from MECO, January 15, 2016

The Hawaiian Electric Companies take very seriously our commitment to provide our customers with safe, reliable, affordable electric service and to achieve our state’s clean energy goals, including a 100% renewable portfolio standard.

Under the existing investor-owned utility model, Hawai‘i is a national clean energy leader, including integrating twenty times more solar per customer than the national average, and generating electricity using almost 50% renewable energy on Hawai‘i Island and more than 30% renewable energy on Maui.

Any credible analysis of alternative utility ownership models or market structures must recognize that such efforts are complex, time consuming and costly and may in fact increase rates for electric customers with no guarantees of improvements in reliability or integration of renewable energy.

• In fact, the report from the County’s consultant says electric rates would likely increase for Maui customers after acquisition of Maui Electric’s assets by either a cooperative or municipal utility. The report also concludes significant investment is needed in the electric grid to achieve the state’s clean energy goals, and yet notes that limited access to capital is a disadvantage of a municipally owned or co-op utility model.
• We haven’t reviewed the proposed legislation regarding eminent domain so we cannot yet comment on the specific proposal, but any effort by the County to acquire Maui Electric through eminent domain or taking the assets of an electric utility would not be simple or fast – or cheap. It would include multiple time consuming steps, considerable uncertainty, and greater expense for legal proceedings.
• The general statements made in the report about the benefits of alternative ownership models also do not take into account the unique circumstances of Hawai‘i and in particular, Maui County’s remote location and three separate island grids.
• Regarding the near-term recommendation to pursue an Independent System Operator or Regional Transmission Operator to plan and run the Maui Electric grid, it should be noted that elsewhere such entities operate in much larger markets, covering multiple states or large states such as California and Texas where costs are spread over very large markets. In our small island market, costs to add this layer of a new organization would likely increase costs to customers.

Even on the mainland, the federal General Accounting Office has reported that there is no consensus that Independent System Operators or Regional Transmission Organizations in other parts of the country have been proven to lower costs for customers. The American Public Power Association says there are questions whether these structures can meet the future reliability needs of their customers,” company representatives said.

PBN: Maui County should turn electric grid over to private company, study says